Mortgage Applications

Mortgage applications decreased -2.6%, falling for the seventh straight week, as interest rates continue to rise up to seven-year highs. The survey of mortgage applications for the week ending in May 18th, found that the refinance index has reached its lowest level in 18 years, decreasing 4% from the week prior. The refinance share of all mortgage application activity decreased to 35.7% from last week’s 35.9%; this decrease is a result of the rising interest rates as they are now at a peak not see in years, last time it was near this level was in 2011. Mortgage applications to purchase home fell as well, they were down 2 percent for the week, yet remain +3% higher than a year ago. Though this decline could be partly due to the rising interest rates, that seem to be heavily affecting the refinance share of applications, the severe shortage of homes for sale appears to be the greater deterrent. The lack of listings amid a market with strong demand is causing home prices to rise at an increasingly high rate. The average loan amount for purchase loans increased to over $320,000 after averaging about $317,000 over the past four weeks that came prior. This increase to loan amount is a likely sign that inventory for lower-priced homes remains at a low level and the mix is still skewed toward larger loan amounts.

PMI Composite Flash

The United States’ composite Purchasing Managers’ Index (PMI) reached its highest level in 3 months, remaining well above the 50 point of no change, this marks either an expansion or contraction in the index; anything above the 50 point mark is a sign of expansion, while anything below 50 would be a sign of contraction to the index.  This increase to the PMI can be largely attributed to the solid acceleration seen in overall business activity. The PMI output index increased in May to 55.7, compared to its level of 54.9 in April; while the services PMI registered at 55.7, up from April’s 54.6 and the manufacturing sector was up only slightly at 56.6 in May compared to 56.5 in April. These increases signal the strongest improvement in business conditions since September of 2014. The solid rate of employment growth was maintained among the private sector in May. The index measuring business expectations for the year ahead held close to the 35 month peak seen last month, April 2018.

New Home Sales

In the month of April new home sales, which account for about 11 percent of housing market sales, ran at a seasonally adjusted annual rate of 662,000. This is down from March’s pace by -1.5% but compared to a year ago it is up 11.6%. This decline was less than what economists predicted as they called for a decline of 2.0 percent. Data for the last three months was revised lower; these revisions show sales in the first three months of the year were not as strong as previously reported.  New home sales are drawn from permits and tend to be volatile on a monthly basis. Builders have been unable to keep up with the housing demand, which is being driven even higher by the robust labor market; they site the expensive lumber, as materials were up 4.2% compared to a year ago, along with the land and worker shortages for the shortages occurring in the housing market. Though mortgage rates are at a 7 year high, economists are blaming the drop in purchases on the shortage of houses at the lower end of the market.

FOMC Meeting

The minutes from the Federal Reserve’s May 1st and 2nd meeting reveal that the committee discussed their outlook for the economy and rates, all members agreed that the inflation target of 2.0% should be met in the upcoming months. Though this target rate was met for the first time in March according to the latest reading, officials are not convinced it will remain at this rate for long. It was noted that it was premature to conclude that inflation would remain at levels around 2%; only several members saw inflation reaching levels above the 2% target. The members of the Federal Reserve confirmed their plan to raise interest rates in the upcoming June meeting. They also didn’t take the chance of a fourth rate hike this year off the table.

Jobless Claims

US weekly jobless claims reached a seven week high, totaling 234,000 for the week ending May 19th vs. the 220,000 that was expected. New applications for US unemployment benefits increased more than expected, rising 11,000 for the second consecutive week. Claims have held below the 300,000 mark, a figure associated with a strong jobs market, for 168 consecutive weeks; for the longest streak since 1969. The labor market is considered to be at or near full employment with the jobless rate near a 7 ½ year low of 3.9 percent. It is within striking distance of the Fed’s forecast of 3.8 percent by year end. The tightening labor market and rising inflation will most likely keep the Federal Reserve on track to increase the interest rate next month.

FHFA House Price Index

Home prices in the first quarter of 2018 were 1.7 percent higher than at the end of the fourth quarter last year. The HPI gained 6.9 percent when compared to the level they were at a year ago, down from February’s yearly gain of 7.4 percent. On a monthly basis prices were 0.1 percent higher than in February, compared to consensus expectations of a 0.7 percent gain. Though prices were up on a monthly basis, the annual rate they increased by slowed about 0.5 percent showing a sign that home prices growth is beginning to taper. Since housing markets began to rebound in 2012, house price appreciation has been positive because demand has outpaced supply; this demand in some regions of the show some signs of slowing and even flattening of the house price growth.

Existing Home Sales

Existing home sales tumbled 2.5 percent in April or million units on a monthly basis, while they also fell 1.4 percent on a yearly basis. Existing homes have declined on a monthly basis after two straight months of increases. The root cause of the underperforming housing sales activity continues to be the lack of available listings on the market and the inability for them to meet the strong demand for buying a home. Existing home sales account for about 90 percent of US home sales. The healthy economy and job market are helping to keep the buyer in the market despite the rising mortgage rates. Inventory shortages are becoming worse than in other recent years as home prices keep climbing above what many homebuyers can afford. The median home price last year at this time was $245,000 vs. this year’s median price of $257,900, a 5.3% increase in median price. This is the 74th consecutive month of year on year gains. Inventory has fallen on an annual basis for almost three years straight, especially among entry level homes that are most sought after by first time homebuyers. The price of existing homes has been increasing for six straight years, making affordability a problem. Existing homes are experiencing declining inventory, deteriorating affordability and stagnant sales volume as demand is unmet by the existing home market.

Durable Goods Orders

The US manufactured durable goods orders reported a bigger than expected goods decrease in new orders in the month of April. Durable goods orders pulled back 1.7% in April after an upwardly revised increase in March of 2.7%. Orders were expected to drop by 1.4% compared to the 2.6% jump reported in March. Excluding orders for transportation equipment, durable goods orders climbed 0.9% in April after they increased by 0.4% in March. Ex transportation orders were expected to increase by only 0.5%.

Consumer Sentiment

US consumer sentiment came in weaker than expected in the final reading of May. The consensus was that consumer sentiment was expected to hit 98.8, the same as the month earlier. Consumer sentiment declined 0.8 points to 98.0, 0.9% above last year’s May. The current economic conditions index slowed 3.1 points to 114.9 for a year on year gain of 0.1%. The May survey, however, found that consumers anticipated smaller income gains than a month or a year ago, even though the unemployment rate is expected to stabilize at its current 18 year low.